GITMAN/ JOEHNK/ BILLINGSLEY
PFIN
4
13
Investing in
Mutual
Funds, ETFs
and Real
Estate
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accessible website, in whole or in part.
LEARNING OUTCOMES
1
Describe basic features and operating
characteristics of a mutual funds and
exchange traded funds
2
Differentiate between open- and closed-end
mutual funds as well as exchange traded
funds, and discuss the various types of fund
loads and charges
3
Discuss types of funds available to investors
and the different kinds of investors services
offered by mutual funds and exchange
traded funds
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PFIN4 | CH13
2
LEARNING OUTCOMES (continued)
4
Gain an understanding of the variables that
should be considered when selecting funds
for investment purposes
5
Identify the sources of return and calculate
rate of return earned on an investment in a
mutual fund as well as evaluate the
performance of an exchange traded fund
6
Understand the role that real estate plays in a
diversified investment portfolio along with
basics of investing in real estate, either
directly or indirectly
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PFIN4 | CH13
3
Mutual Funds and Traded Funds
• Mutual fund
• Financial services organization that receives
money from its shareholders
• Invests funds in a diversified portfolio of
securities
• Exchange traded fund (ETF)
• Investment company whose shares trade on
stock exchanges
• Shares can be bought and sold throughout the
day
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4
Exhibit 13.1 Basic Mutual Fund Structure
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Reasons for Investing in Mutual Funds or ETFs
• Achieve diversification in the investment
holdings
• Obtain services of professional money
managers
• Pooled diversification: Investors buy into a
diversified portfolio of securities for the
collective benefit of individual investors
• Generate rate of return on the investment
capital
• Offer convenience
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6
How Mutual Funds are Organized and Run
• Management company - Runs daily
operations
• Investment advisor - Oversees portfolio
• Distributor - Sells the fund shares
• Custodian - Safeguards the securities and
other fund assets
• Transfer agent - Executes transactions and
maintains other records
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7
Open-End versus Closed-End Funds
• Open-end investment company
• Issues unlimited number of shares that it buys
and sells at a price based on the current
market value of the securities
• Net asset value (NAV): Current market value
of all the securities the fund owns, less
liabilities, on a per-share basis
• Closed-end investment company
• Issues a fixed number of shares which are
themselves listed and traded share of stock
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PFIN4 | CH13
8
ETFs
• Structured as index funds
• Offer professional money management
of mutual funds
• Provide liquidity of an exchange traded
stock
• Distributors can create new shares or
redeem old shares
• Contain higher costs, portfolio turnover
and taxes when managed actively
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Important Cost Considerations
• Load fund: Charges a fee at purchase
• Low: Consists a low purchase fee
• Back-end: Commission charged for
redeeming fund shares
• No-load fund: Involves no transaction
fees charged
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10
Important Cost Considerations
• 12(b)-1 Fee: Annual fee used to offset the
promotion and selling expenses
• Management fee: Paid to the
professional money managers who
administer a mutual fund’s portfolio
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11
Types of Funds
• Growth
• Aims for capital appreciation
• Involves risk exposure
• Viewed as long-term investment vehicles
• Aggressive growth
• Highly speculative investment vehicles
• Seek large profits from capital gains
• Volatile in nature
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Types of Funds
• Value
• Invest in stocks that are considered to be
undervalued by the market
• Equity-Income
• Emphasize current income
• Aim to preserve the capital
• Viewed as low-risk way of investing in stocks
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Types of Funds
• Balanced
• Hold a balanced portfolio of stocks and
bonds
• Generate well-balanced return of current
income and long-term capital gains
• Confine investing to high-grade securities
• Growth-and-Income
• Confine investing to high-quality issues
• Involve risk due to their emphasis on stocks
and capital gains
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14
Types of Funds
• Bond
• Invest in various kinds of fixed-income
securities
• Advantages
• More liquid
• Offer a cost-effective way of achieving a
high degree of diversification
• Automatically reinvest interest and other
income
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15
Types of Funds
• Index
• Buys and holds a portfolio of stocks
equivalent to those in a market index
• Sector
• Restricts investments to particular sector of
the market
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16
Types of Funds
• Money market
• General purpose: Invests in virtually any
type of short-term investment vehicle
• Tax-exempt: Limits its investments to shortterm, tax-exempt municipal securities
• Government securities: Limits its
investments to short-term securities of the
U.S. government and its agencies
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Types of Funds
• Socially responsible: Invest only in
companies meeting social, ethical, and/or
environmental criteria
• International fund: Invest in foreign
securities
• Asset allocation
• Spread investors’ money across all different
types of markets
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Services Offered by Mutual Funds
Automatic investment plan
• Enables investor to channel a set amount of money
systematically into a given mutual fund
Automatic reinvestment plan
• Gives shareholders the option of electing to have
dividends and capital gains distributions reinvested in
additional fund shares
Regular income
• Systematic withdrawal plan: Allows shareholders to be
paid specified amounts of money each period
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Services Offered by Mutual Funds
Conversion privileges
• Allows investors to switch from one mutual
fund to another within in a family of funds
Retirement plans
• Permitted by government legislations for
diverting a part of income of a selfemployed individual
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Selection Process for Making Mutual Fund
and ETF Investments
• Identify objectives and motives for using
funds
• Recognize what funds have to offer
• Eliminate the alternatives
• Evaluate funds investment performance
• Stick with no-load or low-load mutual
funds
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Measuring Fund Performance
• Sources of return
• Dividend income
• Capital gains distributions
• Change in fund's share price
• Evaluating ETF performance
• Reason for investing in an index based ETF is
to replicate the performance of the index
• Determined by R-Squared statistical
measure
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Basic Considerations of Investing in Real
Estate
• Factors affecting the value of real estate
investments
• Cash flow and taxes
• Appreciation in value
• Use of leverage
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23
Speculating in Raw Land
• Investors seek to generate high rates of
return by investing in a property hoping it
will increase in value
• Involves high risk
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Investing in Income Property
• Income-producing property
• Purchased for renting to generate periodic
income in the form of rent receipts
• Commercial properties
• Office buildings, industrial space, and
warehouses to retail space and hotels
• Risk and returns are tied to business
conditions and location
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25
Investing in Income Property
• Residential properties
• Homes, apartments, and smaller multifamily
buildings
• Profitability is influenced by the occupancy
rates
• Other factors to be considered
• Location
• Local regulations
• Supply and demand trends
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Other Ways to Invest in Real Estate
• Real estate investment trust (REIT)
• Accumulates money, by selling shares to
investors to invest in various forms of real
estate
• Types
• Equity
• Mortgage
• Hybrid
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Other Ways to Invest in Real Estate
• Limited partnerships (LPs)
• Managers assume the role of general
partner with unlimited liability
• Other investors are limited partners legally
liable only for the amount of their initial
investment
• Limited liability companies (LLCs)
• Includes a managing member and other
members without any liability
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28
KEY TERMS
• Mutual fund
• Exchange traded fund
(ETF)
• Pooled diversification
• Open-end investment
company
• Net asset value (NAV)
• Closed-end investment
company
• Load fund
• Low-load fund
• Back-end load fund
•
•
•
•
•
•
•
•
No-load fund
12(b)-1 fee
Management fee
General-purpose
money fund
Tax-exempt money
fund
Government securities
money fund
Socially responsible
fund (SRF)
International fund
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH13
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KEY TERMS
•
•
•
•
•
•
Automatic investment plan
Automatic reinvestment plan
Systematic withdrawal plan
Conversion (or exchange) privilege
Income-producing property
Real estate investment trust (REIT)
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
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SUMMARY
• Mutual funds are invested in a diversified
portfolio of securities
• ETF shares are traded on stock exchanges
• Open-end investment companies issue
unlimited number of shares at a price
based on the current market value of the
securities
• Closed-end investment companies issue a
fixed number of shares which are listed and
traded
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH13
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SUMMARY
• Types of funds
• Growth, aggressive growth, value, equityincome, balanced, growth-and-income, bond,
money market mutual funds, index, sector,
socially responsible, international, and asset
allocation
• Variables to be considered while making
mutual funds and ETF investments
• Identify objectives and motives for using
funds, recognize what the funds have to offer,
eliminate the alternatives, and stick with noload or low-load mutual funds
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH13
32
SUMMARY
• Sources of return
• Dividend income, capital gains distributions,
and change in fund's share price
• Factors that affect the value of real estate
investments
• Cash flow and taxes
• Appreciation in value
• Use of leverage
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH13
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